Enter your email to subscribe:

Judgment Day: The Supreme Court Rule on Honest Services Fraud: Understanding the Outcome and its Ramifications - Audio Recording can be found here

False Claims Act - Whistleblower Protection Blog states that on Friday, July 23, 2010, the National Whistleblower Center (NWC) hosted a seminar on the False Claims Act that included a special presentation on the Dodd-Frank Wall Street Reform and Consumer Protection Act that was recently signed into law. Stephen M. Kohn, Executive Director of the National Whistleblower Center, gave the presentation. To obtain the materials from this conference, see here

Last week in United States v. McGee, Seventh Circuit Chief Judge Frank Easterbrook excoriated an unnamed federal prosecutor from the Eastern District of Wisconsin for presenting rank hearsay in the form of an agent's narrative summary. The defendant's extortion and bribery conviction was upheld under plain error analysis, but Easterbrook and the panel were clearly fed up with the AUSA's actions.

According to the opinion:

McGee’s principal argument is that the trial’s first day included a narration of his guilt based on hearsay—and that’s indeed what happened. An FBI agent told the jury that to obtain a warrant for a wiretap the prosecutor had to establish, to a judge’s satisfaction, that the telephone was being used to commit a crime. This recounted what a preliminary investigation had revealed and why the United States Attorney and high-ranking officials at the Department of Justice thought it enough to support audio interception of McGee’s phone calls. Then the agent explained that District Judge Adelman, who issued the warrant for the interception, agreed with this conclusion. The warrant, which recites some of this evidence (and the judge’s conclusion), was introduced into evidence. Before the trial was two hours old, the essence of the prosecutor’s case had been laid before the jury. And not a word of this evidence was from a witness with first-hand knowledge or subject to cross-examination. The process violated both the confrontation clause of the sixth amendment and the hearsay rule.

The Seventh Circuit prohibited such testimony four years ago and McGee's trial took place well after that ruling:

McGee’s trial occurred 22 months after our opinion in Cunningham. The prosecutor should have known that he was eliciting inadmissible testimony. The judge should have known it too, yet did nothing. And defense counsel likewise must have understood that the testimony was out of bounds—yet he did not object. It is unlikely that counsel was asleep; the hearsay rule is second nature to any trial lawyer. Perhaps he viewed the prosecutor’s misstep as a godsend.

Judge Easterbrook and his fellow panel members threatened disciplinary proceedings in the event of any repeat occurrences:

Although McGee is not entitled to a new trial, we are dismayed by the prosecutor’s conduct and disappointed by the district judge’s failure to intervene. The extensive hearsay did not slip in by accident, in the heat of the moment; the prosecutor must have carefully planned this line of testimony. The proper way to introduce jurors to forthcoming wiretap evidence ought to be featured in the United States Attorney’s Manual. The United States has not attempted to defend the propriety of the prosecutor’s tactics. Waiver and the plain-error doctrine may insulate judgments from reversal, but recurrence of an episode such as this may lead to the opening of a disciplinary proceeding for the lawyers involved.

In another portion of the opinion, the panel upheld and approved the trial court's use of mid-trial evidentiary summaries presented to the jurors by the prosecution and defense. Distinguishing the Second Circuit's rejection of such summaries inUnited States v. Yakobowicz, 427 F.3d 144 (2nd Cir. 2005), Judge Easterbrook noted that the summaries were: presented after a weekend break, one to each side, and non-argumentative in nature. Hat tip to Mark Stuaan for bringing this opinion to my attention.

Many believed that there would be difficulty in bringing mail fraud cases if the Supreme Court removed honest services from the statute. The Supreme Court did not provide that relief by its decision in Skilling, but did limit honest services to bribery or kickbacks. But what often goes unnoticed, is that most mail fraud cases are not prosecuted under section 1346, the honest services statute. Most involve a deprivation of money or property, and these cases continue to be allowed.

An example is seen in today's plea with Univision Services Inc., a wholly-owned subsidiary of Univision Communications Inc. The company agree to plead guilty to one count of conspiracy to commit mail fraud and to pay a fine or $500,000 and also $500,000 in a settlement that comes from a parallel investigation by the FCC. Implementation of a compliance plan was also required. A DOJ Press Release states:

"Univision Services admitted that executives, employees and agents of Univision Music Group conspired to commit and did commit mail fraud from approximately 2002 to September 2006. According to court documents, the mail fraud was related to a nationwide scheme in which Univision Music Group executives, employees and agents made illegal cash payments to radio station programmers and managers in exchange for increased radio broadcast time for Univision Music Group recordings. The cash payments were made without on-air acknowledgments or payment of broadcast fees to the radio stations, as required by law."

Here is Assistant AG Ronald Weich's letterto House Judiciary Committee Chairman John Conyers explaining DOJ's declination in the matter of former Attorney General Alberto Gonzales and the firing of U.S. Attorney David Iglesias. And here is George Terwilliger's statement celebrating the declination. Terwilliger and Bob Bittman of White & Case represented Gonzales in the investigation.

The SEC announced the civil charging and settlement with Dell Inc. premised on allegations that "Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival." The SEC Press Release also alleges that "[a]fter Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability." The cost of this can be summed up in the following penalties that were agreed to by the parties:

"Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges."

"Dell Inc. today announced that it has reached a settlement with the U.S. Securities and Exchange Commission (SEC) resolving the previously-disclosed SEC investigation into Dell’s disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of its commercial relationship with Intel Corporation and into separate accounting and financial reporting matters. The settlement terms are consistent with the settlement framework disclosed by the company on June 10, 2010." (italics added).

Also stated in this release are that:

"Sam Nunn, presiding director of the Dell Board, said, 'The Board believes that this settlement is in the best interest of the company, its customers and its shareholders, as it brings a five-year SEC investigation to closure. Dell’s Board reaffirms its unanimous support for Michael Dell’s continued leadership, and the management team in its ongoing commitment to transparent accounting, integrity in financial reporting and strong corporate governance.'"

Check out Macia Coyle's article in the National LJ (law.com), Corporate Sector Sounds the Alarm Over Financial Reform's 'Bounty' Systemas it highlights whistleblower provisions in the forthcoming financial reform package. But one can also expect some new penalty provisions. NACDL has a list of some of the items that were included in drafts of the legislation here. On the NACDL website here it states "[t]hese new offenses, if enacted into law, will further explode the federal criminal code, which already contains an estimated 4,450 criminal offenses."

Fabrice Tourre's Answer has been filed in SEC v. Goldman, Sachs & Co. and Fabrice Tourre. Among other things, Tourre contends that neither he nor Goldman "had a duty to disclose any allegedly omitted information" and that the ABACUS 2007-AC1 offering materials "expressly disclosed that no one was purchasing notes in the equity tranche of the transaction."

The Seventh Circuit Court of Appeals has granted bail to Conrad Black. Like Skilling, the Supreme Court vacated and remanded Black's case back to the Seventh Circuit in light of its holding that honest services applies only to schemes premised on bribery or kickbacks. The grant of bail is "pending the disposition of his appeal" in the appellate court. The Seventh Circuit did, however, remand the case to the trial court "for the limited purpose of permitting the district court to determine the conditions of release."

I was thinking last night about the criminal law implications of the Goldman-SEC settlement. The settlement only confirms what has been fairly apparent from the get-go--this was never a strong fraud case. The SEC extorted a nuisance payment from Goldman and simultaneously sent a signal to the markets that it is serious about its new proactive role.

If the SEC thought that it had a winner, it never would have settled on these terms. Goldman essentially pays 14 days in first quarter profits, admits to a mistake, and agrees to strengthen some aspects of its corporate governance. Goldman avoids lengthy, costly, profit-threatening, and Pandora's Box-opening litigation. And no big shots are forced to resign. When you have to caution your employees not to whoop, holler and smirk in the wake of such a settlement, you know you have made a good deal.

Oh yeah. Goldman agrees to cooperate in the SEC's probe of Fabrice Tourre. All this means is that Goldman's people will come in and talk to SEC attorneys. Tourre has already done plenty of talking himself to Congress, in public and under oath. This was foolish, in my view, for somebody in his position. But it is unlikely that any prosecutor will go after Tourre alone. Goldman was a market-maker here, the parties were sophisticated, and Tourre was hardly off the reservation. Some player's misunderstanding of John Paulson's position, even if caused by a Goldman mistake, is not the same thing as an intentional effort to deceive and defraud.

A key early sign that this was not going to be some slam-dunk fraud action was the SEC's press conference statement, on the day it filed suit, effectively clearing Paulson & Co. of wrongdoing. The SEC, unlike private litigants, can sue, under Rule 10b-5, based on aider and abettor liability. According to the public record, Paulson & Co. took part in several key discussions between Goldman and ACA Capital Management during the time period that the Abacus 2007-ACI CDO deal was being structured. If the SEC seriously believed that big-time fraud was afoot in the Abacus 2007-ACI CDO transaction, it is hard to believe that Paulson & Co. would have been treated in this fashion. If I were a government attorney and thought I had the fraud of the century on my hands, I would want to rope in every potential aider and abettor, and would think very carefully before giving a significant player in an allegedly fraudulent transaction a publicly announced clean bill of health. This is not to say that Paulson & Co. engaged in any wrongdoing. It is instead to suggest exactly the opposite.

So, I do not expect any criminal cases to come out of Abacus 2007-ACI. Of course I have been wrong before. In 1972 I thought McGovern would kick Nixon's ass. But here I will go out on the limb.

As noted here, the 11th Circuit affirmed the lower court's decision in the Snipes case. The unanimous decision authored by Circuit Judge Marcus did not find error in the sentencing, jury instructions, or venue issues raised by Snipes. Snipes had been found guilty after a trial by jury of three misdemeanor offenses and had been acquitted of conspiracy and false claim charges. He also was acquitted on failure to file charges premised on the years 2002, 2003, and 2004. The district court sentenced Snipes to 36 months, which was "comprised of three one-year terms for the failure-to-file convictions, to be served consecutively," followed by additional terms.

Noteworthy in this decision is the court's discussion on the change of venue issue. Snipes's attorneys challenged venue "alleging that the government had chosen Ocala County, Florida, for trial for racially discriminatory reasons." Of particular interest is that the district court granted Snipe's request for a jury instruction on venue and "instructed the jury that the government must prove venue -- the district of Snipe's legal residence -- by a preponderance of the evidence, and that the jury must acquit Snipes if the government had not met its burden." But Snipes was not given the pretrial hearing he wanted on the venue issue and he argued on appeal that "a pretrial hearing was necessary because a defendant cannot be forced to cede his Fifth Amendment right against self-incrimination in order to enforce his right to testify about venue at trial." This argument has worked for some defendants with respect to the Fourth Amendment. The Eleventh Circuit held that Snipe's "Sixth Amendment rights were not impaired in this case." The court stated:

"Snipes had a constitutional right to have venue decided by the jury. It did just that. Both parties presented evidence on venue at trial in great detail. Moreover, the district court fully instructed the jury that venue is an element of the offense and that Snipes must be acquitted if the government failed to establish venue by a preponderance of the evidence."

This could well be an issue that progresses to a higher court. If one is arguing improper venue and saying that the venue was selected for "racially discriminatory reasons," should the jury in that locale decide the issue of venue? Can the accused be placed in the situation of choosing between presenting evidence contrary to the venue and having to forgo rights against self-incrimination? (see background here) Venue motion timing issues may cloud this being the case for determination of these questions. But it is interesting to note that the decision includes no mention of the makeup of the venire or jury.

In addition to all the questions raised by this decision, the case may well be examined because of new evidence. (see here) Stay tuned.

The Eleventh Circuit issued an opinion in the Wesley Snipes case (background here and here) denying defendant's arguments with respect to sentencing, jury instructions, and venue. Snipes had been convicted of three misdemeanor counts of willful failure to file federal income tax returns for three years in violation of 26 U.S.C. s 7203. Commentary forthcoming.

A DOJ Press Release reports that "[n]inety-four people have been charged for their alleged participation in schemes to collectively submit more than $251 million in false claims to the Medicare program in the continuing operation of the Medicare Fraud Strike Force in Miami; Baton Rouge, La.; Brooklyn, N.Y.; Detroit and Houston. It is noted that this "is the largest federal health care fraud takedown since Medicare Fraud Strike Force operations began in 2007."

The SEC website is calling this the "largest-ever penalty paid by a Wall Street firm." (see here) This record penalty of $550 million and agreement to "reform its business practices" will likely be the talk of Wall Street. The SEC Press Release notes that the acknowledgment, "in the settlement papers" by Goldman, is to providing incomplete information. That being:

"Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure."

But it is also noted that "Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933." Not all the money will go to the U.S. treasury as the settlement provides that "$250 million would be returned to harmed investors through a Fair Fund distribution." The settlement is subject to court approval,

The final judgment calls for the company to "expand the role of its Firmwide Capital Committee" in certain respects, and it also calls for some internal legal and compliance measures, and education and training. If you take a position in the mortgage securities offerings it sounds like you will be going through a "training program that includes, among other matters, instruction on the disclosure requirements under the Federal securities laws and that specifically addresses the application of those requirements to offerings of mortgage securities."

The Bureau of Justice Statistics Website, in a Report authored by Katrina Baum and Lynn Langton, is reporting that 2007 statistics show that identity theft is increasing. Specifically they note that "[t]he number of households with at least one member who experienced one or more types of identity theft increased 23% from 2005 to 2007." One can only imagine what the figures will show for 2010.